Public sector is only area to grow as economy hovers on edge of recession

• GDP reduced by 0.6% in final quarter of last year
• Pleas for government to rethink spending cuts

A Treasury spokesman said the government would maintain its current economic course, despite calls from the shadow chancellor and the TUC. Photograph: Martin Argles for the Guardian Martin Argles/Guardian

Pressure is mounting on the government to reverse the most harmful public sector spending cuts after figures showed the UK economy shrank more than previously thought in the last three months of 2010.

Opposition MPs and trade unions called for ministers to find "a plan B that doesn't send the economy over the edge" after official figures showed GDP contracted by 0.6% in the final quarter of last year, compared with the original estimate of 0.5%, which itself was regarded as very grim.

Hopes that the harsh winter weather in December would account for most of the fall in national income were dashed by the Office for National Statistics, which said it contributed 0.5 percentage points to the decline, so without the snow GDP would still have shown a slight fall.

The shadow chancellor, Ed Balls, described the government as reckless in its pursuit of cuts despite the increasingly dire economic data.

Brendan Barber, the TUC general secretary, warned the UK risked losing hundreds of thousands of jobs and vital services if the Treasury persisted with its plan for the most severe spending cuts since the 1970s.

The ONS said all areas of the economy dipped from October to December except the public sector, which grew by 0.7%.

Analysts described the figures as worse than expected. Many said a reliance on public sector growth showed the economy was even more precariously balanced on the edge of recession and a strong recovery would be delayed until next year.

James Knightley of ING said: "The detail shows that government spending was the only positive growth driver. This is fairly worrying given we know about the wave of fiscal austerity that is now starting to hit the UK economy, meaning that we will soon be starting to see negative figures for this component."

The Bank of England is expected to view the figures as another reason to resist calls for a rise in interest rates until the summer and possibly next year.

A steep jump in inflation to 4%, twice the rate targeted by Threadneedle Street, led to calls for early rate rises with many in the City betting on a first move in May.

Three of the nine-strong monetary policy committee have voted in favour of an immediate rate rise. The other members have argued the weakness of the economy means a rate rise could trigger a full-blown recession.

A rise in base rates above the current 0.5% would pose a dilemma for the chancellor, George Osborne, who has relied on cheap mortgages to boost household incomes.

A Treasury spokesman said the government would not be thrown off course and cutting the budget deficit remained an important aim. He also pointed out that official data for the first two months of 2011 was encouraging and showed a revival in business activity.

"The chancellor said that the fourth quarter growth figures were disappointing and today's revision doesn't change that fact. It also doesn't change the need to deal with the nation's credit card – the country is borrowing more this year than is spent on the entire NHS. What's more, the survey data so far this year has exceeded expectations," he said.

However, recent figures have shown increasing nervousness among households about the future of the economy and their own financial prospects. Real incomes, adjusted for inflation, are expected to fall this year and many people in the public sector fear losing their jobs.

The ONS figures showed household spending fell by 0.1% in the fourth quarter, the first drop in 18 months, suggesting consumers were tightening their belts even before the full effects of the government's spending squeeze were well known.

John Lewis, one of the few retailers to prosper in last year's consumer spending squeeze, has reported a steep fall in growth since the first weeks of the year.

The ONS said output from the service industries fell by 0.7% between October and December, rather than 0.5% – led by a 1.1% drop in finance and business services – while industrial production was also revised lower to show growth of 0.7% compared with the earlier estimate of 0.9%. Construction slumped by 2.5%.

A bigger trade deficit and a 2.5% slump in business investment also contributed to the overall decline.